International Financial Law Prof Blog

Editor: William Byrnes
Texas A&M University
School of Law

Friday, April 20, 2018

Tax Cuts and Jobs Act: Assessment of Implementation Planning Efforts

The Treasury Inspector General for Tax Administration (TIGTA) released its audit report of the Internal Revenue Service’s (IRS) efforts in implementing the Tax Cuts and Jobs Act of 2017.

The Act makes significant changes to the tax code affecting individuals, businesses, and tax-exempt organizations. It also contains 119 new provisions that are administered by the IRS and affect both domestic and international taxes. The Joint Committee on Taxation estimates a net reduction in tax of almost $1.5 trillion over Fiscal Years 2018 through 2027 under this law.

TIGTA’s new report concludes that the IRS’s Legislative Affairs function monitored the pending legislation to identify provisions that would affect the IRS and informed the various IRS operating divisions so they could begin to assess how to handle the implementation. Once the law was enacted, the IRS immediately began the task of implementing the new provisions. In addition, the IRS established a multifaceted oversight structure to coordinate implementation activities among the various IRS operating divisions. This included creating an Executive Steering Committee led by the Acting IRS Commissioner, the Tax Reform Implementation Office, and the Tax Reform Implementation Council. The IRS worked with the Department of the Treasury and estimated that implementation of the Act would cost approximately $397 million. This includes hiring an estimated 1,734 full time equivalent positions to implement tax reform over the next two calendar years.

The IRS also took adequate steps to develop the new tax withholding tables. The Tax Cuts and Jobs Act included a provision that made significant changes to income tax rates, income tax deductions and credits, and Federal income tax withholding. The IRS, in conjunction with the Department of the Treasury, designed the Tax Year 2018 withholding table to work with an employee’s existing Form W-4. The IRS also updated its online withholding calculator to work with the revised tax tables to provide taxpayers with the ability to estimate their tax liability and withholding under the Tax Cuts and Jobs Act. The calculator also provides taxpayers with a suggestion as to the number of withholding allowances they should claim for the remainder of Tax Year 2018.

This audit report was prepared only for the purpose of providing information; therefore, no recommendations were made in this report.

Read the report.

April 20, 2018 in Tax Compliance | Permalink | Comments (0)

Saturday, April 7, 2018

IRS releases Data Book for 2017 showing range of tax data, including audits, collection actions and taxpayer service

The Internal Revenue Service today released the 2017 IRS Data Book, a snapshot of agency activities for the fiscal year.

The 2017 IRS Data Book describes activities conducted by the IRS from Oct. 1, 2016, to Sept. 30, 2017, and includes information about tax returns, refunds, examinations and appeals, illustrated with charts showing changes in IRS enforcement activities, taxpayer assistance levels, tax-exempt activities, legal support workload, and IRS budget and workforce levels when compared to fiscal year 2016. New to this edition is a section on taxpayer attitudes from a long-running opinion survey.

Revenue Collection, Returns Processing, Taxpayer Service, and Enforcement Actions 
During fiscal year 2017, the IRS collected more than $3.4 trillion, processed more than 245 million tax returns and other forms, and issued over 121 million individual income tax refunds totaling almost $437 billion.

The IRS provided taxpayer assistance through almost a half billion visits to IRS.gov and helped more than 53 million taxpayers through different service channels, such as correspondence, toll-free telephone helplines or at walk-in sites. There were also more than 278 million inquiries to the “Where’s My Refund” application. 

Compared to the prior year, there were fewer audits and collection actions during fiscal year 2017. The IRS audited almost 934,000 individual income tax returns during the fiscal year, the lowest number of audits since 2003. The chance of being audited fell to 0.6 percent, the lowest coverage rate since 2002.

In FY 2017, the IRS also continued a years-long effort to fight tax-related identity theft. The IRS Criminal Investigation Division completed 524 criminal investigations of tax-related identity thefts.

Several collection activities fell during the fiscal year. IRS levies were down 32 percent compared to the prior year, and the agency filed about 5 percent fewer liens than in fiscal year 2016.

The IRS Data Book’s online format makes navigating data on taxpayer assistance, enforcement, and IRS operations easier. The publication contains depictions of key areas and quick links to the underlying data.

The Comprehensive Taxpayer Attitude Survey (CTAS) 
In 2017, more than 2,000 taxpayers provided the IRS feedback via cell phone, landline or online surveys. Their opinions will help inform IRS efforts to improve taxpayer service. Nearly all taxpayers (about 95 percent) said it is their civic duty to pay their fair share of taxes. Most taxpayers (79 percent of respondents) said that they were satisfied with their personal interactions with the IRS.

An electronic version of the 2017 IRS Data Book can be found on the Tax Stats page of IRS.gov.

April 7, 2018 in Tax Compliance | Permalink | Comments (0)

Monday, April 2, 2018

IRS issues guidance on business interest expense limitations

The Treasury Department and the Internal Revenue Service (IRS) today issued Notice 2018-28, which provides guidance for computing the business interest expense limitation under recent tax legislation enacted on Dec. 22, 2017.   Download Bus interest limitation

In general, newly amended section 163(j) of the Internal Revenue Code imposes a limitation on deductions for business interest incurred by certain large businesses. For most large businesses, business interest expense is limited to any business interest income plus 30 percent of the business’ adjusted taxable income.

Today’s notice describes aspects of the regulations that the Treasury Department and the IRS intend to issue, including rules addressing the calculation of the business interest expense limitation at the level of a consolidated group of corporations and other rules to clarify certain aspects of the law as it applies to corporations. The notice clarifies the treatment of interest disallowed and carried forward under section 163(j) prior to enactment of the recent tax legislation. Finally, the notice makes it clear that partners in partnerships and S corporation shareholders cannot interpret newly amended section 163(j) to inappropriately “double count” the business interest income of a partnership or S corporation.

Today’s notice requests comments on the rules described in the notice and also requests comments on what additional guidance should be issued to assist taxpayers in computing the business interest expense limitation under section 163(j). The Treasury Department and the IRS expect to issue additional guidance in the future.

Today’s notice, Notice 2018-28, will be published in IRB 2018-16 on April 16, 2018.

April 2, 2018 in Tax Compliance | Permalink | Comments (0)

IRS Issues Additional Guidance on Transition Tax on Foreign Earnings

The Treasury Department and the Internal Revenue Service provided additional guidance (Notice 2018-26) for computing the “transition tax” on the untaxed foreign earnings of foreign subsidiaries of U.S. companies under the Tax Cuts and Jobs Act enacted on Dec. 22, 2017. The Treasury Department and the IRS provided prior guidance on the transition tax in Notice 2018-07, Notice 2018-13, and Revenue Procedure 2018-17.

Today’s notice describes regulations that the Treasury Department and the IRS intend to issue, including rules intended to prevent the avoidance of section 965, rules and procedures relating to certain special elections under section 965, and guidance on the reporting and payment of the transition tax. The notice also provides relief to taxpayers from certain estimated tax requirements and penalties arising from the enactment of the transition tax and the change to existing stock attribution rules in the Tax Cuts and Jobs Act.

Additionally, Treasury and the IRS request comments on the rules described in the notice and requests comments on what additional guidance should be issued to assist taxpayers in computing the transition tax. The Treasury Department and the IRS expect to issue additional guidance in the future.

Download April notice on transition tax

April 2, 2018 in Tax Compliance | Permalink | Comments (0)

IRS Issues Guidance on Withholding on the Transfer of Partnership Interests by Foreign Persons

IR-2018-81, April 2, 2018

WASHINGTON ―The Treasury Department and the Internal Revenue Service issued guidance regarding the withholding on the transfer of non-publicly traded partnership interests under the recently enacted Tax Cuts and Jobs Act.

In general, the new law treats a foreign taxpayer’s gain or loss on the sale or exchange of a partnership interest as effectively connected with the conduct of a trade or business in the United States to the extent that gain or loss would be treated as effectively connected with the conduct of a trade or business in the United States if the partnership sold all of its assets.

In this circumstance, the new law also imposes a withholding tax on the disposition of a partnership interest by a foreign taxpayer.

Notice 2018-29 announces that the Treasury Department and the IRS intend to issue regulations, including rules and procedures relating to qualifying for exemptions from withholding or reductions in the amount of withholding under this section of the law. The notice also includes interim guidance designed to allow for the effective and orderly implementation of this section. In addition, the notice suspends secondary partnership level withholding requirements.

The guidance in this notice does not affect the tax liability imposed as a result of the new law. This notice does not affect the suspension of the application of withholding in the case of a disposition of certain publicly traded partnership interests as announced in Notice 2018-08, 2018-7 I.R.B. 352.

Today’s notice requests comments on the rules described in the notice and also requests comments on what additional guidance should be issued to assist taxpayers in applying section these sections of law. The Treasury Department and the IRS expect to issue additional guidance in the future.

Today’s notice, Notice 2018-29, will be published in IRB 2018-16 on April 16, 2018.    Download Withholding on partnership transfers offshore

April 2, 2018 in Tax Compliance | Permalink | Comments (1)

Monday, March 26, 2018

IRS reminds taxpayers to report virtual currency transactions

The Internal Revenue Service today reminded taxpayers that income from virtual currency transactions is reportable on their income tax returns.

Virtual currency transactions are taxable by law just like transactions in any other property. The IRS has issued guidance in IRS Notice 2014-21 for use by taxpayers and their return preparers that addresses transactions in virtual currency, also known as digital currency.

Taxpayers who do not properly report the income tax consequences of virtual currency transactions can be audited for those transactions and, when appropriate, can be liable for penalties and interest.

In more extreme situations, taxpayers could be subject to criminal prosecution for failing to properly report the income tax consequences of virtual currency transactions. Criminal charges could include tax evasion and filing a false tax return. Anyone convicted of tax evasion is subject to a prison term of up to five years and a fine of up to $250,000. Anyone convicted of filing a false return is subject to a prison term of up to three years and a fine of up to $250,000.

Virtual currency, as generally defined, is a digital representation of value that functions in the same manner as a country’s traditional currency. There are currently more than 1,500 known virtual currencies. Because transactions in virtual currencies can be difficult to trace and have an inherently pseudo-anonymous aspect, some taxpayers may be tempted to hide taxable income from the IRS.

Notice 2014-21 provides that virtual currency is treated as property for U.S. federal tax purposes. General tax principles that apply to property transactions apply to transactions using virtual currency. Among other things, this means that:

  • A payment made using virtual currency is subject to information reporting to the same extent as any other payment made in property.
  • Payments using virtual currency made to independent contractors and other service providers are taxable, and self-employment tax rules generally apply.  Normally, payers must issue Form 1099-MISC.
  • Wages paid to employees using virtual currency are taxable to the employee, must be reported by an employer on a Form W-2 and are subject to federal income tax withholding and payroll taxes.
  • Certain third parties who settle payments made in virtual currency on behalf of merchants that accept virtual currency from their customers are required to report payments to those merchants on Form 1099-K, Payment Card and Third Party Network Transactions.
  • The character of gain or loss from the sale or exchange of virtual currency depends on whether the virtual currency is a capital asset in the hands of the taxpayer.

March 26, 2018 in Tax Compliance | Permalink | Comments (0)

Thursday, March 15, 2018

IRS provides additional details on section 965, transition tax; Deadlines approach for some 2017 filers

The Internal Revenue Service today provided additional information to help taxpayers meet their filing and payment requirements for the section 965 transition tax.

The Tax Cuts and Jobs Act requires various taxpayers that have untaxed foreign earnings and profits to pay a tax as if those earnings and profits had been repatriated to the‎ United States. The new law outlines details on the tax rates, and certain taxpayers may elect to pay the transition tax over eight years.

As the March 15 and April 17 deadlines approach for various filers, the IRS released information today in a question and answer format. The Frequently Asked Questions address basic information ‎for taxpayers affected by section 965. This includes how to report section 965 income and how to report and pay the associated tax liability. The information on IRS.gov also provides details on several elections under section 965 that taxpayers can make.

The Treasury Department and the IRS previously released three pieces of guidance related to section 965 issues including Notices 2018-07 and 2018-13 and Revenue Procedure 2018-17‎. The IRS will provide additional guidance and other information on IRS.gov in the weeks ahead.

March 15, 2018 in BEPS, Tax Compliance | Permalink | Comments (0)

Sunday, March 11, 2018

Removal of countries from EU tax haven blacklist

MEPs will review plans to remove eight countries from an EU tax haven blacklist, in a debate on Wednesday evening.

MEPs will hear from the EU Commission and Council on their decision to remove several countries -- including Panama and Tunisia -- from an EU blacklist of tax havens, little more than a month after they were first listed. 

 You can watch the plenary debate via EP Live, and EbS+.

Background

In January, the Commission announced that it would move eight of the original 17 countriesfrom its black list to a “grey list”, drawing further criticism from those who are already sceptical about the lack of sanctions or other financial penalties against countries on the list.  

March 11, 2018 in Tax Compliance | Permalink | Comments (0)

Tuesday, March 6, 2018

IRS Issues Guidance To Stop Carried Interests Loophole With S Corps

Notice 2018-18

Section 1061(a) provides in general that if one or more applicable partnership interests are held by a taxpayer at any time during the taxable year, the excess (if any) of (1) the taxpayer’s net long-term capital gain with respect to such interests for such taxable year, over (2) the taxpayer’s net long-term capital gain with respect to such interests for such taxable year computed by applying paragraphs (3) and (4) of section 1222 by substituting “3 years” for “1 year,” shall be treated as short-term capital gain, notwithstanding section 83 or any election in effect under section 83(b).

Section 1061(c)(1) generally defines the term “applicable partnership interest” as meaning any interest in a partnership which, directly or indirectly, is transferred to (or is held by) the taxpayer in connection with the performance of substantial services by the taxpayer, or any other related person, in any applicable trade or business. 

Section 1061(c)(4)(A) provides that the term “applicable partnership interest” shall not include any interest in a partnership directly or indirectly held by a corporation. Section 1361(a)(1) provides in general that the term “S corporation” means, with respect to any taxable year, a small business corporation for which an election under § 1362(a) is in effect for such year.

Section 1361(a)(2) provides in general that the term “C corporation” means, with respect to any taxable year, a corporation which is not an S corporation for such year. Section 1361(b)(1) defines a “small business corporation” as a domestic corporation which is not an ineligible corporation and which does not -- (A) have more than 100 shareholders, (B) have as a shareholder a person (other than an estate, a trust described in section 1361(c)(2), or an organization described in section 1361(c)(6)) who is not an individual, (C) have a nonresident alien as a shareholder, and (D) have more than 1 class of stock.

THE EXCEPTION IN SECTION 1061(c)(4)(A) DOES NOT APPLY TO PARTNERSHIP INTERESTS HELD BY S CORPORATIONS.

The regulations will provide that the term “corporation” in section 1061(c)(4)(A) does not include an S corporation.  Section 1061 is effective for taxable years beginning after December 31, 2017.  The Treasury Department and the IRS intend to provide that regulations implementing section 3 of this notice will be effective for taxable years beginning after December 31, 2017.

 

March 6, 2018 in Tax Compliance | Permalink | Comments (0)

Wednesday, February 14, 2018

IRS to Revoke U.S. Passports for Tax Debts Starting February 2018

Caplin & Drysdale reports:  As detailed in our prior alert (here), Congress enacted Fixing America’s Surface Transportation Act (the “FAST Act”) in December 2015 and authorized the Internal Revenue Service (“IRS”) to notify the Department of State (“State Department”) when any individual has a “seriously delinquent tax debt.” After receiving notice, the Secretary of State may deny that person the right to use, obtain, or renew a U.S. passport. Though the law was enacted more than two years ago, the IRS has not yet implemented it. That will soon change, as IRS deputy chief counsel (Operations), Drita Tonuzi, indicated during the American Bar Association midyear meeting that the IRS will begin sending certifications of seriously delinquent tax debts to the State Department this month.

Read the full analysis and its impact here.

February 14, 2018 in Tax Compliance | Permalink | Comments (0)

Tuesday, February 13, 2018

Treasury Proposes Repeal of Nearly 300 Outdated Tax Regulations

The U.S. Department of the Treasury today proposed repealing 298 tax regulations that are unnecessary, duplicative or obsolete and force taxpayers to navigate needlessly complex or confusing rules. President Trump issued an Executive Order on April 21, 2017, directing Treasury to review tax regulations to ensure a simple, fair, efficient, and pro-growth tax system. Today’s actions are a direct result of that review.

“We continue our work to ensure that our tax regulatory system promotes economic growth,” said Secretary Steven T. Mnuchin. “These 298 regulations serve no useful purpose to taxpayers and we have proposed eliminating them.  I look forward to continuing to build on our efforts to make the regulatory system more efficient and effective.” 

The regulations proposed to be repealed fall into three categories:

  1. Regulations interpreting provisions of the Code that have been repealed;
  2. Regulations interpreting provisions that have been significantly revised and the existing regulations do not account for these revisions; and
  3. Regulations that are no longer applicable.

Click here to read the regulatory notice.

February 13, 2018 in Tax Compliance | Permalink | Comments (0)

Friday, January 19, 2018

Bassett Mirror Company Agrees to Pay $10.5 Million to Settle False Claims Act Allegations Relating to Evaded Customs Duties

Virginia-based home furnishings company, Bassett Mirror Company, has agreed to pay the United States $10.5 million to resolve allegations that it violated the False Claims Act by knowingly making false statements on customs declarations to avoid paying antidumping duties on wooden bedroom furniture imported from the People’s Republic of China (PRC), the Justice Department announced.          

The United States alleged that between January 2009 and February 2014, Bassett Mirror evaded antidumping duties owed on wooden bedroom furniture that the company imported from the PRC by knowingly misclassifying the furniture as non-bedroom furniture on its official import documents.  Antidumping duties protect against foreign companies “dumping” products on the U.S. market at prices below cost.  The Department of Commerce assesses, and the Department of Homeland Security’s Customs and Border Protection collects, these duties to protect U.S. businesses and level the playing field for domestic products.  Imports of PRC-made wooden bedroom furniture have been subject to antidumping duties since 2004.  At the time of the alleged conduct in this case, wooden bedroom furniture from the PRC was subject to a 216 percent antidumping duty; non-bedroom furniture was not subject to an antidumping duty.

“Those who import and sell foreign-made goods in the United States must comply with the laws meant to protect domestic companies and American workers from illegal foreign trade practices,” said Acting Assistant Attorney General Chad A. Readler for the Justice Department’s Civil Division.  “The Department of Justice will pursue those who seek an unfair advantage in U.S. markets by evading the duties owed on goods imported into this country.”

“This Office will not tolerate anyone who seeks to stack the deck against American workers and products,” said U.S. Attorney Bobby L. Christine for the Southern District of Georgia.  “We will continue to work with our law enforcement partners, as well as our colleagues in the Civil Division, to pursue those who believe that their own profit justifies evasion of federal antidumping duties.”

“CBP is appreciative of information received from the public regarding fraudulent trade activity.  This type of blatant disregard for trade laws and regulations severely impacts the US economy by giving these bad actors an unfair advantage over legitimate importers,” said Donald F. Yando Director of Field Operations for the U.S. Customs and Border Protection Atlanta Field Office. “CBP is committed to working with our partners both inside and outside the government to help bolster the US economy by putting an end to this type of illegal activity.”

The settlement with Bassett Mirror resolves a lawsuit filed under the whistleblower provision of the False Claims Act, which permits private parties to file suit on behalf of the United States for false claims and share in a portion of the government’s recovery.  The civil lawsuit was filed in the Southern District of Georgia and is captioned United States ex rel. Wells v. Bassett Mirror Company, Inc. et al., Civil Action No. 4:13-CV-000165.  As part of today’s resolution, Ms. Wells will receive approximately $1.9 million.

January 19, 2018 in Tax Compliance | Permalink | Comments (0)

Thursday, January 11, 2018

Taxpayer Advocate Report to Congress: IRS’s Approach to Credit and Refund Claims of Nonresident Aliens Wastes Resources and Burdens Compliant Taxpayer

Under Internal Revenue Code (IRC) §§ 1441-1443 and 1461-1465 (Chapter 3), the IRS imposes withholding on payments made to nonresident aliens and foreign corporations and allows credits and refunds of the amounts to which these taxpayers are entitled.

For many years, the operation of this regime closely paralleled the approach taken by the IRS with respect to domestic withholding under IRC § 31 in that there were no restrictions limiting credits or refunds to the amount of withheld tax actually paid over to the IRS.

Based on generalized concerns regarding the potential for fraud and systematic noncompliance, however, in 2015, the IRS altered its administrative policy regarding Chapter 3 refunds.

It no longer allows credits and refunds when taxpayers can prove withholding has occurred, as is the practice in the domestic employment tax context. Instead, the IRS now grants credits and refunds only when the information on Forms 1040NR, U.S. Nonresident Alien Income Tax Return, substantially matches the information on Forms 1042-S, Foreign Person’s U.S. Source Income Subject to Withholding, issued directly to the IRS by withholding agents.

These credits and refunds associated with Forms 1042-S will be referred to, for simplicity, as “1042-S filers.”)

Without an analytic foundation, the IRS took the drastic step of freezing refund claims of 1042-S filers for up to one year or longer while attempting to match the documentation provided by taxpayers with the documentation provided by withholding agents.

The IRS did this even though most 1042-S filers (nearly 80 percent) claim relatively small dollar amounts of withholding (an average of approximately $1,100).

Further, as a group, 1042-S filers appear to be substantially more compliant than a comparable portion of the U.S. taxpayer population. 

The IRS ultimately released these frozen refunds, which impacted over 100,000 taxpayers, after the systemic matching program yielded so many “false positives” that it proved untenable.

The IRS is now redesigning this program.

Nevertheless, only the tools and the processes are being revised, while the program’s philosophy remains unchanged and its underlying assumptions unchallenged. The IRS continues to treat 1042-S filers as “tax cheats” anytime a mismatch arises, even if that mismatch is beyond the taxpayer’s control or is based on some other good-faith error.

As a result, the National Taxpayer Advocate is concerned that:

■ The IRS’s current approach to 1042-S filers does not appear to be based on analysis of quantitative evidence;
■ The IRS is wasting resources and needlessly burdening taxpayers by its undifferentiated approach to 1042-S filers;
■ The IRS has demonstrated a reluctance to enforce compliance among Form 1042-S withholding agents, even though it generally has the ability to do so; and
■ The IRS position of forcing nonresident taxpayers to shoulder the burden of their withholding agents’ reporting and compliance may be subject to litigation hazards under Portillo and other naked assessment cases.

While the need to protect against fraud and systematic noncompliance is understandable, the IRS has so far allocated a disproportionate share of this burden to taxpayers and away from both itself and withholding agents, a step that has only exacerbated the problems caused by the undifferentiated approach adopted by the IRS with respect to 1042-S filers. Current IRS practice is to review certain credit and refund claims of 1042-S filers.

Because the IRS’s legal position is that it has no obligation to honor Form 1042-S credits or refund claims unless the taxpayer has an accurate Form 1042-S from the withholding agent and the withholding agent has remitted the withholding to the IRS, a mismatch of various data fields will cause the issuance of a preliminary disallowance letter.

That letter instructs the taxpayer to contact the withholding agent, figure out the reason for the mismatch, and resolve the issue.

If the taxpayer is unable to carry out this instruction, or the withholding agent is unwilling to cooperate, the taxpayer is left with little practical recourse other than to seek redress in the courts, either against the withholding agent or the IRS itself.

This is a step that many taxpayers lack the resources to undertake, as it involves litigating against withholding agents, many of which are large global companies, or against the IRS. Moreover, as the withholding claimed by nearly 80 percent of 1042-S filers averages only about $1,100 per taxpayer, the cost of litigation for most of these taxpayers would vastly exceed the amounts they are attempting to recover.

The IRS has, in effect, shifted the burden of withholding agent noncompliance to these taxpayers, who are comparatively ill-equipped to pursue any remedies in the event that simple reporting inconsistencies cannot be resolved. By contrast to most taxpayers, the IRS has powerful tools allowing it to directly pursue, and collect from, withholding agents who fail to remit funds.

In addition, the IRS can assess assorted failure to pay and failure to file penalties against these withholding agents.

Nevertheless, the IRS has shown some reluctance to seek recovery from, and impose sanctions against, noncompliant withholding agents. For example, IRS actions to recover unpaid deposits from withholding agents have dropped from 4,302 for TY 2014 to only 1,139 for TY 2015.

Download ARC17_Volume1_MSP_15_International

January 11, 2018 in Tax Compliance | Permalink | Comments (0)

Saturday, December 30, 2017

IRS Criminal Investigation Releases Fiscal Year 2017 Annual Report

The Internal Revenue Service today announced the release of the Criminal Investigation Division’s (CI) annual report, reflecting significant accomplishments and criminal enforcement actions taken in fiscal year 2017.   Focusing on employment tax, refund fraud, international tax enforcement, tax-related identity theft, public corruption, cybercrime, terrorist financing and money laundering, CI initiated 3,019 cases in FY 2017.  The number of cases initiated is directly tied to the number of special agents that CI has.

“We have the same number of special agents—around 2,200—as we did 50 years ago,” said Don Fort, Chief, CI.  “Financial crime has not diminished during that time– in fact, it has proliferated in the age of the Internet, international financial crimes and virtual currency. Despite these challenges, we continue to do amazing work, investigating some of the most complicated cases in the agency’s history.  Criminals would be foolish to mistake declining resources for a lack of commitment in this area.”

The annual report is released each year for the purpose of highlighting the agency’s successes while providing a historical snapshot of the make-up and priorities of the organization. The very first Chief of IRS CI, Elmer Lincoln Irey, served from 1919 to 1946 and envisioned releasing such a document each year to showcase the agency’s investigative work.

CI is the only federal law enforcement agency with jurisdiction over federal tax crimes. This year, CI again boasted a conviction rate rivaling all federal law enforcement at 91.5% while spending more than 72% of their investigative time working tax cases. That conviction rate speaks to the thoroughness of the investigations and CI is routinely called upon by prosecutors across the country to lead financial investigations on a wide variety of financial crimes including international tax evasion, identity theft, terrorist financing and transnational organized crime.

CI investigates potential criminal violations of the Internal Revenue Code and related financial crimes in a manner to foster confidence in the tax system and compliance with the law. The interactive report summarizes a wide variety of CI activity throughout the fiscal year and includes case examples from each field office on a wide range of financial crimes.

“Since taking over as the Chief of CI this summer, I could not be prouder to lead the men and women of this organization,” said Fort. As financial crimes—and the way we investigate them—continue to evolve, CI continues to set the standard for financial investigations worldwide.” 

December 30, 2017 in Tax Compliance | Permalink | Comments (0)

Tuesday, November 21, 2017

What are the implications for partnerships and partnership taxation under the Republican proposals for tax reform?

Charles Lincoln, Esq. (LL.M. International Tax) authors this article analyzing from an international tax law perspective, what might be the effects of the new proposed partnership rules in the US? Charles Lincoln may be contacted at charlieealincolniv@yahoo.com.

Partnerships are a complex combination of sole proprietorship rules, corporate rules, and financial accounting rules—the tax consequences are outlined primarily in Subchapter K of Charles-lincolnthe US Internal Revenue Code.[1] Partnerships often involve individuals and individuals with corporations acting as partners engaging in business. However, when comparing the US approach to partnerships, there can be differences—especially in the concept of opaque and flow entity through taxation. Opaque is when the profits are taxed at the corporate entity level and flow through is when the profits are taxed at the individual level.

In the United States, there is an option to “check the box” whereby one can qualify for flow through status—and this has been a rule since the 1990s. In other countries, there can be different approaches and modes of analysis to determine whether an entity is flow through or opaque. It is important to consider how the US system as it stands currently relates to other countries—and how the proposed changes could alter these inter-national relations.

Partnership Loans in Action:

Practically speaking, there can be vast differences of tax consequences between the opaque approach and the flow through approach. When dealing with a loan from a partner to the partnership in the flow through approach, the loan is really a loan to the partner—thus the tax administrations disregard it at the partner level. Interest paid on that loan is really a distribution of the partnership income to the partner. This can lead to some sincerely tricky situations of whether the loan is an equity injection or not and whether the “interest” paid is really a dividend received. The divergence is hard to tell sometimes.

On the other hand, when dealing with the flow through approach, the partner giving a loan to the partnership could be treated as a loan from a third party to the partnership. In that case, the interest is income to the partner, the interest deduction is given to the partnership [i.e. passed through the appropriate partner(s)], and the question remains as with the opaque approach whether this is really “interest.”

One behavioral consideration in this relatively concrete example of the loan from a partner to the partnership is what the consequences are if the corporate income tax rates fall and what happens with large partnerships—such as accounting firms or law firms. If there are lower corporate income tax rates, then how are the dividends treated, and how are the profits reinvested.

Practical and Policy Considerations:

When tax rates—such as the cascading tax rates proposed in both the House and Senate tax proposals—come into existence, a prudent partnership would have to reorganize itself. In such a reorganization, the partnership would have to decide whether the loan is treated as a distribution of dividends or interest—in the opaque scenario—and whether the loan is treated as income straight to the partner or whether the interest may be deducted when paid from the partnership to the partner—in the flow through example.

As a matter of policy, changes in the corporate income tax, could lead to changes in the personal income tax—assuming a lobbying effort goes into place to follow through with lowering the individual rates. This is because if corporate taxes are changed, then the partner may not want to take out money from the partnership—because her income bracket could be at a higher rate than the corporate rate. Thus, there is an ebb and flow with these scenarios.

The Tax Reform Proposals Affecting Partnerships:

In the Senate Chairman’s Markup of the Tax Cut and Job Act proposal,[2] there are rules regarding hybrid entities that would eliminate deductions for certain non-qualified party related amounts paid or accrued to hybrid entitles or in hybrid transactions. This is probably similar to the OECD suggestions in BEPS Action 2.[3] This is likely going to be a problem for foreign companies financing into the United States. The House Ways & Means Proposal has not spoken on this yet.[4]

Per interest expense limitations, the House has suggested that 30% of adjusted taxable income—in other words the EBITA (earnings before interest, taxes, and amortization) or regarding worldwide groups 110% of the allocation of net thread party interest expenses to the US corruption allocated on EBITA would be allowed for interest expense limitations.[5]

Regarding interest expense limitations, the Senate suggested that the lesser of either 30% of the adjusted taxable income or the limitation based on the amount of debt that the US would hold if the US debt-to equity ratio were propionate to worldwide debt-to-equity ratio limitations. This seems to have roots in BEPS Action 4—especially for the debt-to-equity ratio limitation proposals.[6]

Finally, considering controlled foreign corporation rules, most existing CFC rules in Subpart F of the IRC will be maintained with both the House and Senate proposals. However, there is another added layer of complexity.

The House suggests that a new CFC rule should allow for 50% of the aggregate profits of all CFCs, above a routine return on tangible assets, subject to a taxable income inclusion. It also includes a foreign tax credit allowed for 80% of foreign taxes actually paid by CFCs. The result of this is that US residual tax would lead to an effective tax rate on foreign earnings of CFCS would be too low.

This “residual” tax would lead to some more complexity. If you have a double Irish sandwich[7] at a low tax rate—such as 5.5%--you may have to pay a residual tax. The question is how sustainable this new system would be given its complexity, especially when adding another complexity considering what would tax consequences would occur when you bring IP home under IRC §367. Jokingly such a level of complexity, could ultimately lead one to favor formulary apportionment.

On the Senate side of the CFC proposal, the Senate suggest that 100% of the aggregate profits of all CFCs, above a routine return on tangible assets, would be subject to a taxable income inclusion and foreign tax credits would be allowed for 80% of foreign taxes “actually” paid by the CFC. There is also a provision for a special income tax rate of 10% applied to the taxable income inclusion.

How is this Going to Affect Business?

The rates themselves are highly variable and subject to change. But, there likely will be tax rate changes—at a minimum if the tax reform goes through. When these changes occur, the most immediate change will likely be a restructuring of partnerships determining whether income should be allocated to the partners or remain in the partnership. This depends on whether the income bracket for the partners is higher or lower than the partnership.

Comparing the US Approach to Other Countries’ Approaches in the World:

So far, it’s important to note that partnerships from a business organizational stand point are organized under the commercial code of the specific state in the United States—this is often akin or identical to the Uniform Commercial Code’s format and guided by case law. But there is no federal commercial code. The confluence with tax law comes in at the federal level. So, the partnership is organized under the laws of a specific state—which do vary state to state—and then have federal tax implications when qualifying for pass through taxation.

This approach is different in different countries. For example, Canada has a similar system to the US where there is provincial rules governing partnership formation; Sweden must register with the federal level of government; France allows partnerships to be flow through if the organization fits within the commercial law list of allowed partnerships; in the UK and Australia, partnerships are governed by common law; in the Netherlands the partnership is allowed if inverted under corporate rules—so sort of a side step approach; in Germany the partnership can be a flow through entity only under commercial law[8]; and in Japan the system technically allows for partnerships, but they are hardly present.

Basic Structure Comparisons:

Per the basic structure of partnerships, most countries have some different domestic rules for determining opaqueness and flow through entities. In The Netherlands characterizes income to be determined at the individual level. Each partner can elect different schedules. The UK system has a scheduler system applied at the partnership level. Each partner pays a share, but asset sales are deemed to be made at the individual level.

Comparatively, in the US, the rules in Subchapter K are complex. Elections made at the partnership level. Capital gains and losses are at the individual level. The basis adjustments to the partnership shares are at the individual level as well.[9] The rules allow for the use of capital accounts to reflect economic reality. There is no negative basis allowed. Similarly, Canada is similar to the US, but has simpler rules. Canada applies GAAR instead of the complex US rules when doing a “special allocation.” Moreover, Canada allows for a negative basis.

Sweden is similar to the US but has strict loss rules. It limits the use of losses to income of the partnership. Sweden also employs a scheduler system for business income. Arguably this is a simpler approach.

In Australia, the character of the income is determined at the partnership level with flow through taxation to the individuals. However, gains and losses are determined at the partner level.

Returning to Germany—with the highest level of partnerships of any country other than the United States—all elections, deductions, etc. are determined at the partnership level. There are no special allocations and the partnership agreements control the allocations. Partners losses cannot exceed a partner’s net equity.

In France, all elections are done at the partnership level. There are no special allocations allowed and the partnership agreement controls. There is no annual basis adjustment to shares allowed in the commercial code.

Liabilities – Tax Costs and Loss Limits:

Regarding liability, (i.e. tax costs of the partnership interest) and the loss limitations, the question to ask is what happens at the entity level (the Partnership) with liabilities? And, then how does this treatment impact two things: (1) the Basis in the partnership shares held by the partners (can I invest $10 and get $100 in return through losses); and, (2) What further impact does this have on the ability of the partners to take losses?

As a unique side note, Donald Trump made a lot of money in losses in real estate—whereby he took advantage of the rules allowing for losses allowed only to liability holders.

In the US, partnerships are reflected in the partner’s basis. General partners—not the limited partners—are labile, because they are at risk up to their investment in the partnership. However, there is a special rule for non-recourse debt (in other words, debt not backed by collar) whereby losses are allowed only to liability holders.

In the Netherlands—similarly to the US—partnership debt is considered the debt of the partner. However, there are not extremely detailed and complex rules at the US has.

In the UK, one follows the partnership agreement. Losses flow through the limited partner’s losses limited to the limited partner’s investment. But there can’t exist simultaneously some partners with profit and some partners with losses. Interestingly, there is no basis analysis—meaning the partnership basis is irrelevant to the partner’s basis.

Australia follows the partnership agreement—and like the UK cannot have some partners with profit and some partners with losses at the same time. Diverging from the UK, because of hybrids Australia has introduced new rules to adjust basis by risk and limit losses. 

Canada’s partnership liability does not impact cost basis of a partner in the partnership. Limited partner losses are limited to basis in the general partner—who can take losses in excess of basis. This scenario with the general partner causes negative basis. Thus, at liquidation the general partner will have a larger gain in the end.

France has no limitation on losses from pass through entities—from the partnership to the partner. Sometimes scheduler limitations exist where R/E losses can not exceed R/E gains. Moreover, losses at the partnership level only considered at liquidations.

Finally, Germany—with its high level of partnerships—does not permit for partnership liability to adjust cost basis of the partner in the partnership. Furthermore, liability does impact determination of the limited partner’s equity and losses taken.

Japan has been missing from this discussion of partnership liability and structure before, because although Japan does have provisions for partnerships, they are virtually not existent. Historically, and from a policy perspective, Sweden had a history of tax shelter wars where much fraud occurred—causing Sweden to get rid of these rules.

Conclusion:

In the United States, we have a complex set of partnership rules emanating from Subchapter K of the Internal Revenue Code.

The new tax proposal could change how deductions for partnership are made, interest expense limitations with debt-to-equity ratios, and how new CFC rules may affect foreign earnings.

However, even once these changes occur, it is important to note how they will interact with other systems in the world.

Political and Policy Denouement:

Looking to the future, it seems that events such as the Panama Papers, Lux Leaks, and now the Paradise Papers can lead to political motivation from NGOs in other countries. If one picks up the tabloids in other countries—such as the New York Post’s analogous publication in Australia—one will see the news of the latest movie star and right next to it how a major corporation is avoiding taxes.

To a US audience, this can seem foreign, because our major news sources, much less tabloids, do not often deal with these issues. But they can lead to political pressures in other countries—especially Europe that far outnumbers the US in the OECD. Then these political pressures can lead to domestic policies that then arise in the European Union’s policies—such as the EU state aid investigation cases affecting many US corporations operating—and then to the OECD level.

Indeed, what can be a better political strategy than raising taxes on corporations—who don’t vote in your country—to raise taxes and re-allocate spending within the specific country.

When the changes percolate to the OECD level, then the OECD can make monumental changes, such as the BEPS project that affect countries internationally.

So, several years later, such changes at the OECD level become parts of US tax reform domestically—as seen with the debt-to-equity ratios, etc. This often originates with major news items, such as Lux Leaks or the Panama Papers—more closely scrutinized by foreign audiences. Thus, it is important to look at the leaks, where the political pressure goes from those leaks, and then how that pressure can percolate up to the OECD level and ultimately influence US domestic rules and Senate Finance Committee Proposals. It’s all connected.

 

[1] § 42:2.Comparison of Subchapter S and Subchapter K, 13 Tex. Prac., Texas Methods of Practice § 42:2 (3d ed.)

[2] https://www.finance.senate.gov/chairmans-news/hatch-releases-modifications-to-senate-tax-plan

[3] OECD/G20 Base Erosion and Profit Shifting Project Limiting Base Erosion Involving Interest Deductions and Other Financial Payments: Action 2: 2015 Final Report (OECD, 2015) http://www.oecd.org/ctp/neutralising-the-effects-of-hybrid-mismatch-arrangements-action-2-2015-final-report-9789264241138-en.htm

[4] Tax Cuts and Jobs Act, H.R. 1 (115th Cong. 1st Sess. 2017).

[5] (H.R. 1) http://src.bna.com/t9z

[6] OECD/G20 Base Erosion and Profit Shifting Project Limiting Base Erosion Involving Interest Deductions and Other Financial Payments: Action 4: 2015 Final Report (OECD, 2015) http://www.oecd.org/tax/beps/limiting-base-erosion-involving-interest-deductions-and-other-financial-payments-action-4-2016-update-9789264268333-en.htm

[7] An example of how this Double Irish Sandwich operates is as follows: “S1 transfers its headquarters to Bermuda, which has no income tax, thus becoming a Bermuda resident. Because of their different tax laws, the United States views the subsidiary as Irish but Ireland views the subsidiary as nonresident. S1 then licenses the IP to a wholly owned Irish subsidiary, "S2," which is not recognized as a corporation by the United States but is recognized by Ireland. The United States allows certain entities to elect to be classified as a corporation, partnership, or disregarded entity by "checking the box" on IRS Form 8832. Partnerships and disregarded entities are not recognized for U.S. tax purposes, and their assets and income are instead attributed to their parent corporation. S2 collects the income from the IP in Ireland, where it experiences a low tax rate, and is able to deduct the royalties it pays to S1 under Irish tax laws. This transaction is not taxed by the United States, as under U.S. law it is viewed as a transfer within a single Irish corporation. Thus, the royalties are untaxed but are deductible, and the IP income is taxed at a low rate. U.S. taxes are avoided.”

ARTICLE: TECHNOLOGICAL INNOVATION, INTERNATIONAL COMPETITION, AND THE CHALLENGES OF INTERNATIONAL INCOME TAXATION, 113 Colum. L. Rev. 347, 399

[8] Incidentally, Germany has the highest level of flow through entities out of any country in the world after the US, because 1930s National Socialist policy promoted that Germans to be “responsible” for their own activities and not hide behind a corporate shield—a good Nazi formed a partnership:

“"It took the Reichsfinanzhof, then the supreme German court for tax law, another eleven years to establish, in 1933, that GmbH & Co. KGs were to be taxed like ordinary partnerships, i.e. transparently, and not like corporations. However, the GmbH & Co. KG was truly kick-started, inadvertently, only by Nazi economic policy. According to Nazi ideology, a good German businessman should be personally liable. Limited liability was regarded as cowardly and immoral. Therefore, the Nazi regime wanted to encourage the transformation of closely held corporations, in particular GmbHs, into general partnerships. [emphasis added by author] In order to implement this policy, corporations were subjected to unrelieved and prohibitive corporate income taxation. At the same time, corporations were given the opportunity to convert into partnerships without negative tax consequences. " Erik Röder, Combining Limited Liability and Transparent Taxation: Lessons from the Convergent Evolution of GmbH & Co. KG,S Corporation, LLC and Co., Working Paper Max Planck Institute (2017).

[9] However, this is not the whole story. “If a partnership has a substantial built-in loss, the § 743(b) adjustments are mandatory. Id. § 743(a), (d). The total § 743 adjustment is the difference between the transferee partner's basis in his partnership interest and his share of the adjusted basis of the partnership property.” Jeffrey M. Colon, The Great Etf Tax Swindle: The Taxation of in-Kind Redemptions, 122 Penn St. L. Rev. 1, 68 (2017).

November 21, 2017 in Tax Compliance | Permalink | Comments (0)

Thursday, November 16, 2017

International Tax Reform? Why Expatriate When Wealthy Americans Can Move to Virgin Islands and Not Pay Federal Capital Gains Tax?

Page 97 of the Senate Finance Committee Modified Mark published around midnight last night: Modification to source rules involving possessions

Description of Proposal
The proposal modifies the sourcing rule in section 937(b)(2) by modifying the U.S. income limitation to exclude only U.S. source (or effectively connected) income attributable to a U.S. office or fixed place of business. The proposal also modifies section 865(j)(3) by providing that capital gains income earned by a U.S. Virgin Islands resident shall be deemed to constitute U.S. Virgin Islands source income regardless of the tax rate imposed by the U.S. Virgin Islands government.

The U.S. Virgin Islands has an income tax system that “mirrors” the U.S. Code. The U.S. Virgin Islands may also impose certain local income taxes in addition to taxes imposed by the mirror Code. The Code provides rules for coordination of United States and U.S. Virgin Islands taxation. It permits the U.S. Virgin Islands to reduce or remit tax otherwise imposed by the mirror code if the tax is attributable to U.S. Virgin Islands source income or income effectively connected to the conduct of a trade or business in U.S. Virgin Islands. The U.S. Virgin Islands has exercised that authority to provide development incentives for certain types of businesses operating within its borders. Under such initiatives, companies can receive a 90 percent reduction in their tax liability on certain income.

Under the mirror Code, U.S. Virgin Islands citizens and residents are taxable on their worldwide income. A foreign tax credit is allowed for income taxes paid to the United States, foreign countries, and other possessions of the United States. In general, a bona fide resident of the U.S. Virgin Islands is required to file and pay tax only to the possession; compliance with that obligation satisfies any Federal income tax filing obligation. ...

In the case of an individual who is a U.S. citizen or alien residing in the United States or the U.S. Virgin Islands, only one tax is computed under the Code. If an individual is a bona fide resident of U.S. Virgin Islands for the entire taxable year, such tax is payable to the U.S. Virgin Islands and no U.S. tax is imposed. Otherwise, a citizen or resident of the United States who has income from sources within the U.S. Virgin Islands must determine the portion of income attributable to the U.S. Virgin Islands and the related tax payable to the U.S. Virgin Islands. The remaining portion is payable to the United States.

Concerns that U.S. citizens not resident in the U.S. Virgin Islands were improperly claiming residence in the U.S. Virgin Islands or forming entities in the U.S. Virgin Islands in order to recharacterize income earned in the United States as sourced in the U.S. Virgin Islands and claim the 90 percent economic development credit led to legislative changes in 2004. These changes provided a definition of bona fide residence in a possession and rules to determine source of income from possessions. They also impose a requirement that individuals report any change in residency status with respect to a possession during a taxable year.

 

November 16, 2017 in Tax Compliance | Permalink | Comments (0)

Tuesday, November 14, 2017

Fighting Tax Crime: The Ten Global Principles

The OECD's Task Force on Tax Crimes and Other Crimes (TFTC) has a mandate to improve co-operation between tax and law enforcement agencies, including anti-corruption and anti- Fighting Tax Crimes bookmoney laundering authorities, to counter financial crimes more effectively. The TFTC's work is carried out in connection with the OECD's Oslo Dialogue, a whole of government approach to tackling tax crimes and other financial crimes. 

Fighting Tax Crime: The Ten Global Principles sets out the 10 essential principles for effectively fighting tax crimes. It covers the legal, institutional, administrative, and operational aspects necessary for putting in place an efficient system for fighting tax crimes and other financial crimes. It draws on the insights and experience of jurisdictions around the world.

The purpose is to allow jurisdictions to benchmark their legal and operational framework, and identify areas where improvements can be made. Future work in this area will include adding country specific details, covering a wide range of countries.

November 14, 2017 in AML, Tax Compliance | Permalink | Comments (0)

Monday, November 13, 2017

Is Senate Finance Committee Reduction in Retirement Savings of Public Education and Government Employees an Attack or Leveling the Playing Field?

I have been focused this past week on understanding the impact and implementation of the House Ways & Means and Senate Finance Committee proposals on U.S. businesses foreign source income.  Two proposals that interest me are the ones aimed at transfer pricing, being (1) the minimum deemed distribution of a foreign subsidiary's earnings above a statutorily defined return on tangible capital and (2) the 20% excise tax on payment to foreign related corporations.  

I recognize that the 2017 Tax Reform discussion originally was partly about whether the Code should be used for incentives in favor of an activity or Senate Financetaxpayer.  But the dueling Chamber proposals are now out and tax reform based on equity and on eliminating tax-incentives died on arrival.  It the same old 'every interest' vying for a portion of the pie.  That's the democratic, political "Gulchi Gulch" process.  Given that I work at a public academic institution, I have 'a dog in this fight' described below. Hope that the government relations staff of NTEU, of state universities, and of other government employee stakeholder groups raise their voices like the Seraphim to the Republican members of the Finance Committee that are willing to listen.

So what's so alarmed me to divert my attention to the retirement provisions of the Senate Chair's mark?  Did not the President state that retirement would be left alone (see his tweet here)?   Senate wasn't listening to him as usual. 

The Senate Finance Committee Chair slipped in (at page 178) an explosive measure for government employees that also impacts public academic institutions.  The Senate Finance Committee Tax Reform Chair's Mark under the current status (November 9, 2017) will limit public employees to one aggregate amount of $18,500 for retirement plans 403(B) and 457 as of January 1, 2018.  Government, including public institution, employees needs to become immediately aware that this provision will critically reduce their ability to contribute to their employer retirement plan(s) by $18,500 (or $24,500 for employees 50 years and older) as of January 1, 2018.   Thus, while there is still time to make December 1st contribution changes to preserve the last year of the additional $18,000 (or $24,000 if at least 50 years of age), these employees need to arrange with their payroll officers to contribute before December 31st any difference between what is allowed in 2017 and what has actually been contributed.  As of January 1, 2018, the ability to contribute is gone forever.  

Curiously, I have not found an informative article about the impact of this provision, much less calling for employees to contact their Senator.  Silence from the public university crowd that is usually quite loud although this provision will damage their ability to attract researchers, faculty, and staff from the higher compensation opportunities of private educational institutions and for-profit industry.   

Instead of the beneficial retirement system, government agencies and public institutions need to find more revenue to pay competitive salaries and employee benefits to replace the loss of the retirement benefits (doubtful) Senate Finance will take away.  Lacking better salaries, government agencies and public institutions will experience disproportionate employee turnover of the best performing management coupled with a declining ability to attract highly accomplished professionals and researchers to replace the pool. 

Perhaps this provision is a Republican payback to government agencies like the IRS because Republicans think that the current government management pool is biased against Republican groups or lacks service for taxpayers?  But taking out the best performing managers will exasperate the challenges, not remediate them.  If this is a 'payback', then it is also 'cutting of one's nose'.   Perhaps the provision is but a Machiavellian move in a contest for talent between a state university and its private counterpart? 

Maybe the silence from the government and public institutions employees is 'heads in the sand', and perhaps 'those in the know' think this provision will not survive because JCT scored it as only worth $100 million a year at least until 2021 (so why waste the political capital).  Apportioned amongst all government employees in the US (being federal and state), state public academic institutions I suspect are less than 10 percent of this score, thus about $10 million a year for offset (inconsequential basically).  A carve-out from this provision for public educational institutions would address the harmful issue and can be negotiated in response to the proposed loss of the current carve-out for deferrals allowed for section 403(b) plan for at least 15 years of service to an educational organization, hospital, home health service agency, health and welfare service agency, and church.  Albeit seems to me that we want to also incentivize doctors, nurses, social workers, and clergy to stay long-term in their public positions instead of moving to lucrative private industry.  

M. Retirement Savings (see page 177 - 178 of Senate Finance Committee Chairman Markup attached)  Download 11.9.17 Chairman's Mark

1. Conformity of contribution limits for employer-sponsored retirement plans

Present Law: In the case of a governmental section 457(b) plan, all contributions are subject to a single limit, generally for 2017, the lesser of (1) $18,000 plus an additional $6,000 catch-up contribution limit for employees at least age 50 and (2) the employee’s compensation. This limit is separate from the limit on elective deferrals to section 401(k) and section 403(b) plans. Thus, for example, if an employee participates in both a section 403(b) plan and a governmental section 457(b) plan of the same employer, the employee may contribute up to $18,000 (plus $6,000 catch-up contributions if at least age 50) to the section 403(b) plan and up to $18,000 (plus $6,000 catch-up contributions if at least age 50) to the section 457(b) plan.

Finance Committee Chair Proposal: The proposal applies a single aggregate limit to contributions for an employee in a governmental section 457(b) plan and elective deferrals for the same employee under a section 401(k) plan or a 403(b) plan of the same employer. Thus, the limit for governmental section 457(b) plans is coordinated with the limit for section 401(k) and 403(b) plans in the same manner as the limits are coordinated under present law for elective deferrals to section 401(k) and section 403(b) plans.
 
Hatch Amendment #2 to Chairman’s mark of “Tax Cuts and Jobs Act.”
Short Title: An amendment to the catch up contribution rules for section 401(k), 403(b) and 457)(b) retirement savings plans.
Description of Amendment: This amendment would require all catch up contributions to section 401(k), 403(b) and 457(b) retirement savings plans to be Roth only, and increase the $6,000 catch up contribution annual limit applicable to such plans to $9,000.

November 13, 2017 in Tax Compliance | Permalink | Comments (0)

OECD Publishes Effective Inter-Agency Co-Operation in Fighting Tax Crimes and Other Financial Crimes - Third Edition

Financial crimes are increasingly sophisticated, with criminals accumulating significant sums through offences such as drug trafficking, fraud, extortion, corruption and tax evasion. Tax Crimes bookDifferent government agencies may be involved in detecting, investigating and prosecuting these offences and recovering the proceeds of crime, or may hold information essential to these activities. This report describes the current position in 51 countries as to the law and practice for domestic inter-agency co-operation in fighting tax crimes and other financial crimes including, for the first time, co-operation with authorities responsible for the investigation and prosecution of corruption. It identifies successful practices based on countries’ experiences of inter-agency co-operation in practice and makes recommendations for how co-operation may be improved.

Download Effective-inter-agency-co-operation-in-fighting-tax-crimes-and-other-financial-crimes-third-edition

The report includes chapters on:

  • organisational models for agencies fighting financial crime;
  • legal gateways to enable the sharing of information between agencies;
  • models for enhanced co-operation, such as joint investigation teams and multi-agency intelligence centres; and
  • country-specific sections, containing information on the position in each of the 51 countries covered by the report.

November 13, 2017 in AML, Tax Compliance | Permalink | Comments (0)

Monday, November 6, 2017

Early Christmas Gift Announcement: US Overseas Taxpayers Subject to Three New IRS Scrutiny Campaigns & Audits Next Year

Since the enactment of FATCA, US persons (citizens and green card holders) overseas have, via lobbying efforts, requested relief from the additional tax compliance burdens placed Christmas-eve-1846481_960_720 upon them that appear to be increasing their costs of living overseas (which is generally more expensive than living in the USA anyway).  Their arguments fall into the following three: (1) generally, they file foreign tax returns and pay local tax preparation services but must also pay an additional $2,000- $3,000 for a US tax preparation service specialized in foreign residence; (2) generally the foreign income exclusion and foreign tax credit wash out the U.S. tax burden but for anomalies in definitions between retirement plans that cause undue burden on foreign residents US persons; and (3) US persons must pay more for financial services because they have become the pariah of the financial world. 

On November 3, 2017, the IRS responded.  But the response is not exactly what the foreign resident U.S. persons had in mind.  The IRS will subject these foreign resident U.S. persons to three new compliance campaigns to root out the noncompliant, employing audits and other investigatory strategies.  The IRS has delivered an early Christmas announcement for US tax advisers of the coming great year!  Advising on the new tax code section enacted pursuant to "tax reform simplification" combined with advising the foreign resident US taxpayers that will potentially be caught up in the three campaigns' scrutiny will deliver strong 2018 fee earning results.  

  • Foreign Earned Income Exclusion Campaign

Practice Area: Withholding & International Individual Compliance

Lead ExecutiveJohn Cardone

Individuals who meet certain requirements may qualify for the foreign earned income exclusion and/or the foreign housing exclusion or deduction. This campaign addresses taxpayers who have claimed these benefits but do not meet the requirements. The Internal Revenue Service will address noncompliance through a variety of treatment streams, including examination.

  • Individual Foreign Tax Credit (Form 1116)

Practice Area: Western Compliance Practice Area

Lead Executive: Paul Curtis

Individuals file Form 1116 to claim a credit that reduces their U.S. income tax liability for the amount of foreign taxes paid on foreign source income. This campaign addresses taxpayer compliance with the computation of the foreign tax credit limitation on Form 1116. Due to the complexity of computing the Foreign Tax Credit and challenges associated with third-party reporting information, some taxpayers face the risk of claiming an incorrect Foreign Tax Credit amount. The IRS will address noncompliance through a variety of treatment streams including examinations.

These campaigns represent the second wave of LB&I's issue-based compliance work. More campaigns will continue to be identified, approved and launched in the coming months.

  • Swiss Bank Program Campaign

Practice Area: Withholding & International Individual Compliance

Lead Executive: John Cardone

In 2013, the U.S. Department of Justice announced the Swiss Bank Program as a path for Swiss financial institutions to resolve potential criminal liabilities. Banks that are participating in this program provide information on the U.S. persons with beneficial ownership of foreign financial accounts. This campaign will address noncompliance, involving taxpayers who are or may be beneficial owners of these accounts, through a variety of treatment streams including, but not limited to, examinations.

November 6, 2017 in Tax Compliance | Permalink | Comments (4)